Company Apple, Inc. ROA =13.58%, ROE=37.90%, Net Income=47.8B, Retained earnings

Question

Company Apple, Inc. ROA =13.58%, ROE=37.90%, Net Income=47.8B, Retained earnings 96.54B

Answer Questions 1 through 5 below

1-calculate its internal growth rate for the last fiscal year: = (ROA RR) / [1-(ROA RR)] =

2- Calculate the firm’s sustainable growth rate for the last fiscal year: = (ROE RR) / [1-(ROE RR)] =

3-Consider your results. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? Show calculations.

4-If the chosen firm grows at its sustainable growth rate with increases in both its retained earnings and debt, maintaining a constant debt ratio, how will this affect its WACC?

5-If the chosen firm attempts to grow faster than its sustainable growth rate with modest increases in its debt ratio, how will this likely affect its WACC? What about very large increases in its debt ratio? Explain.

Name of Company/Stock

Apple

Ticker Symbol

AAPL

WACC

11.33%

Cost of debt, iD

1.4696%

Corporate tax rate, TC

26.25%

Total debt, D

49878.5

Total equity, E

561529.630 Mil

Total firm value, V

584.71B

Cost of equity, iE

12.245%

CAPM Components

Beta,

1.43

Historical market return, iM

Assumed 11%

Risk-free rate, iF

Assumed 3%

Using data in the table confirm the accuracy of the site’s WACC calculation:

Weight of Equity

561529.630/561529.630+49878.50=.9184

Weighted Average Cost of Equity

E

561529.630/561529.630+49878.50=.9184*12.245%=.1125

Weight of Debt

4988.5/561529.630+49878.5=0.0816

Pre-Tax Weighted Average Cost of Debt

D

4988.5/561529.630+49878.5=0.0816*1.4696%=.0012

After-Tax Weighted Cost of Debt

D · (1- TC)

4988.5/561529.630+49878.5=0.0816*1.4696%=.0012*.7375=.0008

Weighted Average Cost of Capital

= · iE + · iD · (1-Tc)

.9184 (e/(e+d)*12.245% (cost of equity)+.0816*(d/(e+d)1.4696%(cost of debt)*1-26.25%(1-tax rate)=11.33%

Name of Company/Stock

Apple

Ticker Symbol

AAPL

Explanation / Answer

1. The current dividend payout ratio of apple Inc is 25% (Source:http://www.gurufocus.com/term/payout/AAPL/Dividend-Payout-Ratio/Apple-Inc)

The ROA = 13.58% = 0.1358

The retention ratio is 1-0.25 = 0.75

Internal Growth rate = (ROA RR) / [1-(ROA RR)] = (0.1358*0.75)/[1-(0.1358*0.75)] = 0.113399 = 11.34%

2. The sustainable growth rate = (ROE RR) / [1-(ROE RR)]

Given ROE = 37.90% = 0.3790 and RR = 0.75

Sustainable growth rate = (0.3790*0.75)/[1-(0.3790*0.75)] = 0.3971 = 39.71%

3. If the firm uses only retained earnings and uses internal growth rate, the WACC would be higher since there will be no tax advantage of debt. The rate of return with only retained earnings would be the cost of equity which is 12.245% and this would be the WACC and there would be no tax advantage of debt

4. If the company uses debt, the cost of debt will be lower and this will reduce the WACC . If the company employs 30% debt, the new WACC would be = 0.3*1.47 + 0.7*12.245 = 9.0125%. As the debt increases, the WACC decreases.

5. As the amount of debt increases, the WACC comes down because debt has significantly lower costs when compared to equity along with the tax advantage. Hence the WACC would be lower with increase in debt. However if the debt keeps on increasing the debt ratio will also increase which may result in financial distress in the long term. Hence there would significant financial distress costs when debt is increased.

The WACC calculation is accurate as 11.33%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.